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Tuesday, May 27, 2014

Legality of a Contractual Estoppel against Challenge to Patent Validity

Can a licensee who has reaped the
benefits of a patented invention challenge the validity of the patent? Under
the Patents Act, 1970, yes. Section 140(1)(d) provides that it shall not be
lawful to insert in a patent-related contract or license a clause that prevents
the licensee from challenging the validity of the licensed patent. It goes on
to say that such a condition shall be void.

The said provision, which flows
from Article 40 of the TRIPS, was introduced in the Act as part of the 2002
amendment. Interpreting the provision in Enercon (India) Limited v. Aloys
Wobbenin January 2013, the
IPAB observed as follows:

“Licensee Estoppel

14.
The learned counsel for the respondent submitted that though S.140 of the
Patents Act provides for avoidance of certain restrictive conditions, it is
always subject to Ss. 115 and 117 of the Indian Evidence Act. Having
pleaded that the applicant is the transferee of the technology transferred, it
cannot destroy the validity of the intellectual property that was
transferred. There is lack of good faith. Learned counsel referred
to paragraph-18 of the written statement filed by the applicant herein in the
suit before the Delhi High Court. It was submitted that after revocation
petition was filed, the applicant stopped paying the royalty. Learned
counsel referred to various paragraphs in the written statement. Learned
counsel submitted that an order of revocation is a discretionary remedy and the
discretion shall not be exercised in favour of the applicant. Learned counsel
referred to the derivative action suit filed before the Bombay High
Court. Learned counsel submitted that the applicant must surrender the
rights under the agreement (Intellectual Property Licence Agreement) before it
attacks the patent.

15. In
response, Mr. R. Parthasarathy, learned counsel for the applicant submitted
that on 8.12.2008, the licence had been terminated and once it has been
terminated, the subsequent application for revocation will not be
barred by estoppel. Learned counsel submitted that the respondent cannot
plead in the same breath that the license has been terminated and that the applicant
as the licensee is estopped from challenging it. According to him, the suit in
the Bombay High Court was for a relief regarding the payment of royalty, etc.
where the Court will decide the construction of documents and it is still
pending before the Bombay High Court. Learned counsel submitted that the
answer to the question whether a licensee can file a revocation is ‘yes’ and
referred to S. 140 of the Patents Act. He submitted that the power under
S. 64 is very wide. He referred to the decision in Lear, Inc v. John S.
Adkins [395 U.S.653, 89, S.Ct.1902].

16.
So we will see whether even if the applicant is a person interested, he is
estopped from suing for revocation being a licensee. S. 140 says that it is not
lawful to insert in a licence to manufacture or use a patented article or to
work any process protected by a patent, any condition of prevention to
challenges to the validity of a patent. This is the law. This
condition will govern all licences which relate to or are in relation to a patented
article or a process protected by a patent. Learned counsel for the
applicant relied on AIR 2010 SC 259 in which it was held that there can be no
estoppel against a statute.

17.
In Lear Incorporated v. John S.Adkins [395 U.S.653, 89, S.Ct.1902], it has been
held that the contractual rights give way to public interest in a challenge to
a patent and therefore, even a licensee can attack an unworthy patent. In
Lear , the inventor was Adkins. He was hired by Lear Incorporated to
develop a gyroscope which was required in the aviation industry. Adkins
developed an invention which Lear incorporated in its production process.
In the litigation where Adkins claimed compensation for Lear’s use of the
improvements which the inventor has patented, Lear sought to prove that Adkins
inventions were not sufficiently novel. The inventor argued that as a
licensee, Lear must pay. The California Supreme Court relied on the rule
of estoppel to bar Lear from proving that Adkins’ invention was not patentable.
The U.S. Supreme Court granted Certiorari in this case to reconsider the
Hazeltine rule which invoked estoppel to deny a licensee the right to prove
that the licensor’s idea was really a part of the public domain. The U.S.
Supreme Court said that the present federal policy favoured free competition in
ideas which do not merit patent protection, and that the licensee
estoppels had an uncertain status and it is a product of judicial efforts to
accommodate the competing demands of the common law of contract in the federal
law of patents. It observed that instead of a creative compromise, there
has been a chaos of conflicting case law. It also observed as under:

“Surely the
equities of the licensor do not weigh very heavily when they are balanced
against the important public interest in permitting full and free competition
in the use of ideas which are in reality a part of the public domain.
Licensees may often be the only individuals with enough economic incentive to
challenge the patentability of an inventor’s discovery. If they are
muzzled, the public may continually be required to pay tribute to would-be
monopolists without need or justification. We think it plain that the
technical requirements of contract doctrine must give way before the demands of
the public interest in the typical situation involving the negotiation of a
license after a patent has issued.”

The U.S. Supreme Court also held that
the overriding federal policies would be significantly frustrated if licensees
are required to continue to pay royalty during the time they are challenging
the patent’s validity. The Court observed that enforcing this contractual
provision would undermine the strong federal policy favouring full and free use
of ideas in the public domain. So we have the Act which says that the
conditions which restrict the right of a licensee from challenging the patent
are illegal and we have the opinion of the U.S. Supreme Court explaining why a
licensee is entitled to invalidate the patent. This restriction imposed by
S.140, is another indicator of the public interest angle in patent law. While
the law shall protect the rights of the property owner, it will not restrict
the rights of the interested person to challenge the grant, so that unworthy
patents are restored to the public domain.

Because of the costs of the litigation
and the very special nuances of the technology, it may very well be that the
licensee alone is capable of challenging the patent. He has the funds and the
knowledge to launch the attack on the subject matter of the invention. This is
why the U.S. Supreme Court held that it would be inequitable to restrict him
from attacking the patent by any condition in the contract. The Parliament has
specifically introduced this provision in our Patents Act which is a special
enactment as far as patents are concerned and hence it will prevail over the
general rules relating to contract. Therefore no licensee can be estopped from
challenging the patent. This objection is rejected.”

I don’t think I could have
captured the spirit and objective of Section 140 better. What needs to be
understood is that the freedom to challenge the validity of a patent extends to
a compulsory licensee and a prospective licensee as well. Considering
additionally that a licensee or a prospective licensee is also a “person
interested” within the meaning of Section 2(1)(t) of the Act who has the commercial
incentive and the technical wherewithal to challenge the validity of the
patent, I tend to agree with the policy intent underlying Section 140.